Between its life-changing continuous glucose monitors, consistent growth, and sound fundamentals, DexCom (DXCM 0.38%) has many of the hallmarks of a good investment. And, with its manufacturing capacity ramping up while further research and development efforts push forward to make even more sophisticated products, the future appears quite bright.
But will these beneficial tailwinds be enough to make new investors into millionaires in the next few years? It's unlikely because the stock won't be experiencing triple-digit growth anytime soon. Nonetheless, it could still be a worthwhile investment, so let's explore why this company is worthy of your attention.
DexCom's product is a great fit for its market
DexCom's wearable continuous glucose monitoring (CGM) products help people with diabetes to manage their conditions without the pain of repeatedly pricking their fingers to take glucose measurements from droplets of blood. Wearable sensors pierce the patient's skin only once, after which they can wear it for up to 10 days. The sensor then uploads data to a smartphone application, which helps patients to calibrate their intake of glucose-stabilizing medicines as well as food. For patients with an obsession for data, there's also a suite of charting tools that can be applied to historical blood glucose readings.
The target market for the sensors is patients on intensive insulin therapy (IIT). These patients are the most likely to require an extensive number of finger sticks to measure their blood glucose level in a given day, so they stand to benefit the most. Of the 3.3 million patients who need IIT in the U.S., 40% of those with type 1 diabetes and 20% of those with type 2 diabetes currently use a continuous glucose monitor. This means that DexCom's target market has plenty of room to grow, which is good news. Outside of the U.S., the potential for growth is even larger. In the future, management plans to penetrate the non-intensive market, which it estimates to be around 27 million people in the U.S.
There are a few important financial metrics that are trending in favor of significant long-term growth. The first of these is the profit margin, which is at a healthy 12.69%. This indicates that DexCom can sustainably serve its existing customer base despite making technologically sophisticated products and spending a significant amount on research and development. Similarly, the company's year-over-year quarterly revenue growth is strong at 26.4%, as is its quarterly earnings growth at 57.6%. While revenue growth has slowed somewhat this year, total revenues topped $500 million in the third quarter, which is a new record for the company.
Finally, DexCom has $1.82 billion in debt, which isn't too overwhelming when compared to its cash holdings of $2.6 billion and its trailing free cash flow of $62.46 million. As long as its debts don't balloon, they won't negatively affect investments in growth.
Why you won't make millions with this stock
Despite its positive qualities, I don't think that the stock is about to make anyone into a millionaire. First, it probably can't continue to expand its revenue as rapidly as it has in the past, now that large and powerful competitors like Abbott Laboratories (ABT 0.71%) are staking their claims in the CGM market. Abbott's lineup of CGM products is larger, and it may be able to lock consumers into its product ecosystem.
More importantly, DexCom's valuation appears to be quite inflated. The median price-to-earnings ratio of companies in the medical diagnostics and research industry is 36.05, whereas DexCom's is 137.87. This means that each share is expensive compared to the earnings that it commands, which will likely dissuade many investors from purchasing the stock, preventing its price from rising consistently. There's no law that says that the stock won't grow because its ratio is too high, but you'll probably need to wait until the price drops to a less inflated level before the company's future growth has a chance of making you into a millionaire.